Compliance April 11, 2023

SEC Makes Important Investment Company Act Exemption

Allowing one tech company to avoid registering as investment company could be the first step toward a permanent rule.

Reported by


The Securities and Exchange Commission recently issued an order allowing an unnamed company, under certain conditions, to hold securities in excess of 40% of its total assets without having to register as an investment company.

Under the Investment Company Act of 1940, companies which hold more than 40% of their assets as securities must register with the SEC as an investment company. If they fail to do so, they cannot take on debt or sell stock in their company, and the SEC is even empowered to void their contracts, according to Amy Caiazza, a partner and head of the fintech and financial services group at the Wilson Sonsini Goodrich & Rosati law firm. Treasuries are not counted toward the 40% threshold.

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Operating companies are sometimes swept up by this law if they have few tangible assets. Caiazza explains that many tech firms do not have a lot of equipment or inventory, so even relatively small investments can reach the 40% threshold quickly. Additionally, many tech firms hold much of their worth in less tangible assets not counted by the SEC, such as intellectual property rights. Their trouble lies not in having a high numerator of securities, but in having a low denominator of non-securities by which to divide out their securities into a sub-40% total.

Caiazza explains that the 40% threshold was designed in 1940 to distinguish operating companies from investment companies, but the threshold does not make sense for certain tech firms in 2023. Many tech companies will invest in low-return securities, such as corporate bonds, as a cash management and consequently, exceed the 40% threshold and run into trouble with the SEC.

As an alternative to registering or going out of business, companies can apply for a cash management order, which is an exemption from this requirement. In this case, Wilson Sonsini was able to acquire an order from the SEC for a client which permits that company to invest “without limit in ‘capital preservation instruments’ such as invest-grade corporate bonds, commercial paper, certificates of deposit, and other highly liquid, investment-grade securities,” without having to register as an investment company.

The SEC set certain conditions on the exemption. The company must use these cash management instruments to fund its business operations, it cannot engage in speculative investing and no more than 10% of its assets can be in non-exempt securities.

Caiazza is optimistic this order can be used as a model for similar orders, and she says staff at the SEC wrote this order with an eye toward standardization, though Caiazza notes that companies cannot rely on orders and exemptions given to other companies and must secure their own in the absence of a rule.

Caiazza acknowledges that the SEC order reads like a rule proposal and that a rule would certainly make life easier for other tech firms concerned about the 40% threshold.

When asked why the SEC relies on orders of this kind instead of a rule change, Caiazza said, “It probably is time for the SEC to consider adopting a new rule that would apply to tech companies.”

Deals & People April 11, 2023

Nuveen Muni Head Steps Down on Heels of Legal Settlement

The firm said 30-year veteran John Miller will be replaced by current taxable muni lead Daniel Close.

Reported by


Nuveen’s head of municipal investing, John Miller, will retire after a 30-year career building the division’s assets under management to $188 billion, TIAA’s investment arm announced Monday.

The firm noted on the same day that it had reached a settlement with Preston Hollow Community Capital LLC, which alleged in a 2020 complaint that Miller had used “threats and lies” to damage Preston Hollow’s business relationships. The firms did not disclose the terms of the settlement, but they announced that Nuveen will be a “significant minority investor” in Preston Hollow.

Miller, who joined Nuveen LLC in 1996, began leading the municipal investment team in 2007, including its $17.7 billion high-yield municipal bond fund, which makes bets on the riskiest government debt. He will continue to work as a portfolio manager until his retirement on June 1, according to the firm.

“I am deeply grateful for my years at Nuveen and retire with a profound sense of pride in all that our dedicated and extremely talented team accomplished,” Miller said in a statement.

Miller is being replaced as head of municipal investing by Daniel Close, a portfolio manager who has been running Nuveen’s taxable municipals business. Close, who began his investment career in 1998, will oversee a group of 80 investment professionals and will be a manager on funds such as the high-yield municipal bond fund. Stephen Candido has joined Close in managing that fund, according to the company’s website.

The transition will include the firm leveraging its “deep bench of senior executives” to move management responsibility for 10 of the firm’s more than 60 municipal bond funds, according to the announcement. Nuveen will make no changes to its separately managed accounts, investment-grade municipals or taxable municipals businesses.  

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The settlement with Preston Hollow comes after four years of legal battles stemming from a 2020 complaint alleging Miller had called broker/dealers such as Goldman Sachs and JPMorgan Chase & Co. to caution them against pitching Preston Hollow’s municipal bond offerings. In the complaint, Preston Hollow positioned itself as a “burgeoning contender in the high-yield municipal bond market” that Miller was seeking to “eliminate.”

“Nuveen’s conduct constituted tortious interference with Preston Hollow’s business relations with six different broker-dealers … and caused actual economic harm with respect to Preston Hollow’s relationship with each of those broker-dealers,” the firm alleged.

A Delaware Court of Chancery judge ruled that Nuveen illegally interfered with Preston Hollow’s business but concluded that damages were “too speculative to be determined.” Preston Hollow then sought damages in a separate case in Delaware, a claim that was dismissed, and appealed in 2022. It also sought further recourse through antitrust litigation filed in a federal court in Manhattan.

According to Monday’s announcement Monday, the settlement resolves all outstanding litigation claims against Nuveen and Miller. Nuveen’s investment in the firm will go toward funding Preston Hollow’s strategy of “direct sourcing and structuring of financings to help deliver meaningful and measurable social impact to borrowers and their respective communities,” according to the announcement.

“It is a testament to both organizations that Preston Hollow and Nuveen kept the lines of communication open throughout the litigation, and we’re pleased to have reached a constructive resolution that supports our shared interests and the broader municipal market,” Jim Thompson, Preston Hollow chairman and CEO, said in a statement.

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